The global equity markets experienced a decline for the quarter, with the S&P 500 being the only major equity index posting positive returns. Continued geopolitical concerns and conflicts overseas were the main detractors from the equity market returns for the quarter. The tensions between Russia and Ukraine resurfaced as Russia attempted to destabilize Ukraine and became subject to further Western economic sanctions as a result. The escalating conflicts in the Middle East, economic slowdown in China and weakness in the Eurozone were also catalysts for the sell-off. Concerns in the global markets helped strengthen the U.S. dollar relative to major developed markets currencies. The rising dollar led to losses in non-U.S. stocks and bonds as well as a decrease in commodities prices.

The non-U.S. equity markets ended the quarter in negative territory. The European Central Bank (the “ECB”) maintained their loose monetary policy and noted that they will keep rates low for the foreseeable future. The ECB also announced that they may initiate quantitative easing in October as key nations within the Eurozone, such as Germany, experienced a contraction in their economies during the quarter. The Bank of Japan is also expected to announce an extension of their asset purchases in October. And although China’s growth was modest, investors are still weary of the region and its ability to hit its economic growth target due to corporations being over-leveraged and decreasing demand.

The U.S. equity markets ended the quarter with modest gains despite a sharp sell-off in July. Performance amongst the asset classes and categories varied widely as large-cap growth was the only domestic equity asset class to post positive performance. Small-caps experienced significant selling pressure as investors believed that the asset class is overvalued. Growth strategies outperformed their respective value strategies. Performance of the S&P 500 Index sectors also varied with healthcare and technology outperforming. Defensive and interest rate sensitive sectors, such as Utilities, underperformed as a result of increasing rates. Energy was the worst performing sector as oil prices declined during the quarter.

In the fixed income markets, the riskier sectors underperformed their more conservative counterparts. Municipal bonds were the strongest performing sector due to tight supply and issuance, combined with decreasing 10-year Treasury yields. The strengthening U.S. dollar hurt returns for bonds denominated in foreign currencies, particularly Emerging Market Debt.  High Yield and Treasury Inflation Protected Securities experienced significant volatility and underperformed for the quarter.

The domestic economy showed signs of strengthening for the quarter. The final estimate for second quarter Gross Domestic Product (“GDP”) was strong, signaling that the pent-up demand in the U.S economy may support sustained economic growth. Labor market data was strong and the unemployment rate decreased below the 50-year average of 6.1% for the first time since its peak in 2009. However, labor force participation still remains at multi-decade lows as the Baby Boom population continues to retire. The Federal Reserve (the “Fed”) and its policies remain a focus for investors as the Fed noted in their recent minutes that, while Quantitative Easing will likely be phasing out in October 2014, the timing of rate hikes is data-dependent and the Fed still maintains a dovish monetary policy.

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